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Exam 12: Corporate valuation and financial planning

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Question 1

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Which of the following statements is CORRECT?

A) The AFN equation for forecasting funds requirements requires only a forecast of the firm's balance sheet.Although a forecasted income statement may help clarify the results, income statement data are not essential because funds needed relate only to the balance sheet.
B) Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast.
C) A negative AFN indicates that retained earnings and spontaneous liabilities are far more than sufficient to finance the additional assets needed.
D) If the ratios of assets to sales and spontaneous liabilities to sales do not remain constant, then the AFN equation will provide more accurate forecasts than the forecasted financial statements method.
E) Any forecast of financial requirements involves determining how much money the firm will need, and this need is determined by adding together increases in assets and spontaneous liabilities and then subtracting operating income.

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Question 2

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A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.

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Question 3

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As long as a firm does not pay out 100% of its earnings, the firm's annual profit that is retained in the business (i.e., the addition to retained earnings)is another source of funds for a firm's expansion.

Which of the following is NOT one of the steps taken in the financial planning process?

One of the necessary steps in the financial planning process is a forecast of financial statements under each alternative version of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios.

The term "additional funds needed (AFN) " is generally defined as follows:

Which of the following assumptions is embodied in the AFN equation?

A firm's profit margin is 5%, its debt/assets ratio is 56%, and its dividend payout ratio is 40%.If the firm is operating at less than full capacity, then sales could increase to some extent without the need for external funds, but if it is operating at full capacity with respect to all assets, including fixed assets, then any positive growth in sales will require some external financing.

The capital intensity ratio is the amount of assets required per dollar of sales and it has a major impact on a firm's capital requirements.

If a firm with a positive net worth is operating its fixed assets at full capacity, if its dividend payout ratio is 100%, and if it wants to hold all financial ratios constant, then for any positive growth rate in sales, it will require external financing.

Daniel Sawyer, the CEO of the Sawyer Group, is initiating planning for the company's operations next year, and he wants you to forecast the firm's additional funds needed (AFN) .The firm is operating at full capacity.Data for use in your forecast are shown below.Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions.

A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise.Which of the following conditions would cause the AFN to increase?

North Construction had $850 million of sales last year, and it had $425 million of fixed assets that were used at only 60% of capacity.What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?

Operating plans sketch out broad approaches for realization of the firm's strategic vision.These plans usually are developed for a period no longer than a 1-year time horizon because detail is "lost" by extending out the time horizon by more than 1 year.

The capital intensity ratio is generally defined as follows:

A firm will use spontaneous funds to the extent possible; however, due to credit terms, contracts with workers, and tax laws there is little flexibility in their usage.

You have been asked to forecast the additional funds needed (AFN) for Houston, Hargrove, & Worthington (HHW) , which is planning its operation for the coming year.The firm is operating at full capacity.Data for use in the forecast are shown below.However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 50%, which the firm's investment bankers have recommended.Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions.

Weber Interstate Paving Co.had $450 million of sales and $225 million of fixed assets last year, so its FA/Sales ratio was 50%.However, its fixed assets were used at only 65% of capacity.If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions) would it have generated?

The minimum growth rate that a firm can achieve with no access to external capital is called the firm's sustainable growth rate.It can be calculated by using the AFN equation with AFN equal to zero and solving for g.

The Besnier Company had $250 million of sales last year, and it had $75 million of fixed assets that were being operated at 80% of capacity.In millions, how large could sales have been if the company had operated at full capacity?